SEC Examinations of RIAs and Broker-Dealers under the ReTIRE Initiative

This is my 38^th article about interesting observations concerning the Department of Labor’s fiduciary rule and exemptions. These articles also cover the DOL’s FAQs interpreting the regulation and exemptions.

As explained in my last post (Angles #37), the SEC’s Office of Compliance Inspections and Examinations (OCIE) issued a National Exam Program Risk Alert concerning examinations about services offered by RIAs and broker-dealers to investors with retirement accounts. One of the areas specifically identified for those examinations is “Reasonable Basis for Recommendations.” The OCIE described that issue as:

“Registrants have important obligations under the federal securities laws and SRO rules (with respect to broker-dealers) when making recommendations or providing investment advice. To the extent applicable and required, the staff will assess the actions of registrants and their representatives for consistency with these obligations when: (i) selecting the type of account; (ii) performing due diligence on investment options; (iii) making initial investment recommendations; and (iv) providing on-going account management.”

At the end of the language about “selecting the type of account,” the SEC included a footnote that referenced FINRA guidance on rollovers to IRAs. That footnote said:

“See FINRA, Rollovers to Individual Retirement Accounts, Regulatory Notice 13-45 (December 2013) (FINRA Regulatory Notice 13-45) (“A recommendation concerning the type of retirement account in which a customer should hold his retirement investments typically involves a recommended securities transaction, and thus is subject to Rule 2111. For example, a firm may recommend that an investor sell his plan assets and roll over the cash proceeds into an IRA. Recommendations to sell securities in the plan or to purchase securities for a newly-opened IRA are subject to Rule 2111.”)”

Combining the language in the Risk Alert with the language in the footnote, the OCIE is saying that recommendations to participants to take distributions from plans (that is, from one type of account), and rolling over to an IRA (that is, to another type of account) will be scrutinized. It also suggests that the OCIE favorably views FINRA’s analysis in Regulatory Analysis 13-45.

In my next post, I will discuss the rollover discussion in FINRA Regulatory Notice 13-45.

For the moment, though, as a word to the wise, broker-dealers and RIAs should review their procedures and policies, as well as their supervisory programs, to ensure that their advisers are complying with the expectations of the OCIE and with the provisions of Regulatory Notice 13-45.

The views expressed in this article are the views of Fred Reish, and do not necessarily reflect the views of Drinker Biddle & Reath.

The material contained in this communication is informational, general in nature and does not constitute legal advice. The material contained in this communication should not be relied upon or used without consulting a lawyer to consider your specific circumstances. This communication was published on the date specified and may not include any changes in the topics, laws, rules or regulations covered. Receipt of this communication does not establish an attorney-client relationship. In some jurisdictions, this communication may be considered attorney advertising.

The views expressed in this article are the views of Fred Reish, and do not necessarily reflect the views of Faegre Drinker.